Edgar Filing: PARKE BANCORP, INC.

f10q_093012-0343.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2012.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 000-51338

PARKE BANCORP, INC.

(Exact name of registrant as specified in its charter)

New Jersey		65-1241959
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 Delsea Drive, Washington Township, New Jersey		08080
(Address of principal executive offices)		(Zip Code)

856-256-2500

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer”, “accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of November 14, 2012, there were issued and outstanding 5,383,893 shares of the registrant's common stock.

PARKE BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

INDEX

		Page
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

SIGNATURES

EXHIBITS and CERTIFICATIONS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Parke Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands except share and per share data)
	September 30,			December 31,
	2012			2011
Assets
Cash and due from financial institutions	$	1,934		$	3,733
Federal funds sold and cash equivalents		98,949			106,495
Total Cash and cash equivalents		100,883			110,228

Investment securities available for sale, at fair value		21,457			22,517
Investment securities held to maturity (fair value of $2,209 at September 30, 2012 and $2,080 at December 31, 2011)		2,058			2,032
Total investment securities		23,515			24,549

Loans held for sale		1,835			225

Loans, net of unearned income		603,560			625,117
Less: Allowance for loan losses		(17,487	)		(19,323	)
Net loans		586,073			605,794

Accrued interest receivable		2,765			3,039
Bank premises and equipment, net		4,072			4,122
Other real estate owned (OREO)		28,102			19,410
Restricted stock, at cost		2,225			3,565
Bank owned life insurance (BOLI)		5,679			5,541
Other assets		15,041			14,265
Total Assets	$	770,190		$	790,738
Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	28,392		$	31,146
Interest-bearing deposits		611,308			603,709
Total deposits		639,700			634,855

FHLB borrowings		20,488			50,607
Other borrowed funds		10,000			10,000
Subordinated debentures		13,403			13,403
Accrued interest payable		631			618
Other liabilities		4,378			3,982
Total liabilities		688,600			713,465
Equity
Preferred stock, cumulative perpetual, $1,000 liquidation value; authorized 1,000,000 shares; Issued: 16,288 shares at September 30, 2012 and December 31, 2011		16,016			15,868
Common stock, $.10 par value; authorized 10,000,000 shares; Issued: 5,594,793 shares at September 30, 2012 and 5,097,078 shares December 31, 2011		560			510
Additional paid-in capital		48,869			45,844
Retained earnings		19,366			17,808
Accumulated other comprehensive loss		(632	)		(626	)
Treasury stock, 210,900 shares at September 30, 2012 and December 31, 2011, at cost		(2,180	)		(2,180	)
Total shareholders’ equity		81,999			77,224
Noncontrolling interest in consolidated subsidiaries		(409	)		49
Total equity		81,590			77,273
Total liabilities and equity	$	770,190		$	790,738
See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
	For the nine months ended September 30,						For the three months ended September 30,
	2012			2011			2012			2011

Interest income:
Interest and fees on loans	$	27,637		$	29,802		$	8,766		$	9,912
Interest and dividends on investments		800			1,033			259			329
Interest on federal funds sold and cash equivalents		178			75			59			31
Total interest income		28,615			30,910			9,084			10,272
Interest expense:
Interest on deposits		5,011			5,965			1,552			1,960
Interest on borrowings		709			1,066			234			352
Total interest expense		5,720			7,031			1,786			2,312
Net interest income		22,895			23,879			7,298			7,960
Provision for loan losses		5,800			6,850			1,500			2,350
Net interest income after provision for loan losses		17,095			17,029			5,798			5,610
Noninterest income (loss):
Loan fees		251			185			91			20
Net income from BOLI		138			133			47			45
Service fees on deposit accounts		166			166			62			58
Gain on sale of SBA loans		2,057			3,892			700			751
Other than temporary impairment losses		—			(132	)		—			(48	)
Portion of loss recognized in other comprehensive income (OCI) (before taxes)		—			47			—			20
Net impairment losses recognized in earnings		—			(85	)		—			(28	)
Loss on sale of real estate owned		(757	)		(525	)		(132	)		(577	)
Other		712			173			184			56
Total noninterest income		2,567			3,939			952			325
Noninterest expense:
Compensation and benefits		4,267			4,227			1,415			1,406
Professional services		1,065			966			288			321
Occupancy and equipment		776			751			244			248
Data processing		307			316			103			92
FDIC insurance		824			877			278			192
OREO Expense		1,025			431			339			219
Other operating expense		2,704			1,940			803			574
Total noninterest expense		10,968			9,508			3,470			3,052
Income before income tax expense		8,694			11,460			3,280			2,883
Income tax expense		2,895			4,605			1,365			1,161
Net income attributable to Company and noncontrolling interest		5,799			6,855			1,915			1,722
Net income attributable to noncontrolling interest		(442	)		(848	)		(194	)		(152	)
Net income attributable to Company		5,357			6,007			1,721			1,570
Preferred stock dividend and discount accretion		758			749			253			251
Net income available to common shareholders	$	4,599		$	5,258		$	1,468		$	1,319

Earnings per common share
Basic	$	0.86		$	0.98		$	0.25		$	0.23
Diluted	$	0.85		$	0.96		$	0.25		$	0.23
Weighted average shares outstanding
Basic		5,378,103			5,374,561			5,872,276			5,818,506
Diluted		5,381,347			5,458,044			5,872,643			5,841,855
See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
	For the nine months ended September 30,							For the three months ended September 30,
	2012				2011			2012				2011
	(in thousands)							(in thousands)
Net income attributable to Company		$	5,357			$	6,007		$	1,721			$	1,570
Unrealized gains on securities:
Non-credit related unrealized gains (losses) on securities with OTTI			12				16			(7	)			(4	)
Net unrealized (losses) gains on securities without OTTI			(28	)			109			(58	)			22
Total unrealized (losses) gains on securities			(16	)			125			(65	)			18
Pension liability adjustments			10				31			4				14
Total other comprehensive (loss) income			(5	)			156			(61	)			32
Total comprehensive income		$	5,351			$	6,163		$	1,660			$	1,602
See accompanying notes to consolidated financial statements

Parke Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGE IN TOTAL EQUITY
(unaudited)
	Preferred Stock		Shares of Common Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity			Non-Controlling Interest			Total Equity
	(in thousands except share data)
Balance, December 31, 2011	$	15,868		5,097,078	$	510	$	45,844	$	17,808		$	(626	)	$	(2,180	)	$	77,224		$	49		$	77,273
Capital withdrawals by noncontrolling interest																						(900	)		(900	)
Stock options exercised				9,332		1		34											35						35
10% common stock dividend				488,383		49		2,991		(3,041	)								(1	)					(1	)
Comprehensive income:
Net income										5,357									5,357			442			5,799
Non-credit unrealized gain on securities with OTTI, net of taxes													12						12						12
Net unrealized( loss) on securities without OTTI, net of taxes													(28	)					(28	)					(28	)
Pension liability adjustments, net of taxes													10						10						10
Total comprehensive income																			5,351			442			5,793

Dividend on preferred stock (5% annually)										(610	)								(610	)					(610	)
Accretion of discount on preferred stock		148								(148	)

Balance, September 30, 2012	$	16,016		5,594,793	$	560	$	48,869	$	19,366		$	(632	)	$	(2,180	)	$	81,999		$	(409	)	$	81,590

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the nine months ended September 30,
	2012			2011
	(Amounts in thousands)
Cash Flows from Operating Activities
Net income	$	5,799		$	6,855
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		267			273
Provision for loan losses		5,800			6,850
Bank owned life insurance		(138	)		(133	)
Supplemental executive retirement plan expense		102			286
Gain on sale of SBA loans		(2,057	)		(3,892	)
SBA loans originated for sale		(18,679	)		(21,993	)
Proceeds from sale of SBA loans originated for sale		19,210			24,455
Loss on sale of other real estate owned		757			525
Contribution of OREO property		138			—
Other than temporary decline in value of investments		—			85
Net accretion of purchase premiums and discounts on securities		(10	)		(59	)
Changes in operating assets and liabilities:
Increase in accrued interest receivable and other assets		(448	)		(908	)
Increase (decrease) in accrued interest payable and other accrued liabilities		316			(1,047	)
Net cash provided by operating activities		11,057			11,297
Cash Flows from Investing Activities
Purchases of investment securities available for sale		(4,148	)		—
Redemptions (purchases) of restricted stock		1,340			(77	)
Proceeds from sale of securities available for sale		—			500
Proceeds from maturities, calls and principal payments on securities		5,039			2,983
Proceeds from sale of other real estate owned		1,331			3,175
Advances on other real estate owned		(227	)		(4,387	)
Net decrease (increase) in loans		3,230			(17,427	)
Purchases of bank premises and equipment		(217	)		(161	)
Net cash provided by (used in) investing activities		6,348			(15,394	)
Cash Flows from Financing Activities
Payment of dividend on preferred stock		(610	)		(611	)
Cash payment of fractional shares on 10% stock dividend		(1	)		(1	)
Minority interest capital withdrawal, net		(900	)		(812	)
Net decrease in Federal Home Loan Bank and short term borrowings		(30,119	)		—
Proceeds from exercise of stock options and warrants		35			—
Payments of Federal Home Loan Bank advances		—			(113	)
Net (decrease) increase in noninterest-bearing deposits		(2,754	)		227
Net increase in interest-bearing deposits		7,599			17,080
Net cash (used in) provided by financing activities		(26,750	)		15,770
(Decrease) increase in cash and cash equivalents		(9,345	)		11,673
Cash and Cash Equivalents, beginning of period		110,228			57,628
Cash and Cash Equivalents, end of period	$	100,883		$	69,301
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowed funds	$	5,707		$	7,219
Income taxes	$	4,015		$	5,601
Supplemental Schedule of Noncash Activities:
Real estate acquired in settlement of loans	$	10,691		$	802

See accompanying notes to consolidated financial statements

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

Parke Bancorp, Inc. ("Parke Bancorp” or the "Company") is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the "Bank").

The Bank is a commercial bank which commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and insured by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through branches in Galloway Township, Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania.

The Bank competes with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The Bank is subject to the regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

The FDIC and the New Jersey Department of Banking and Insurance Consent Orders: On April 9, 2012, the Bank entered into Consent Orders with the FDIC and the New Jersey Department of Banking and Insurance (the “Department”). Under the Consent Orders, the terms of which are substantially identical, the Bank is required, among other things, subject to review and approval by the FDIC and the Department: (i) to adopt and implement a plan to reduce the Bank’s position in delinquent or classified assets; (ii) to adopt and implement a program providing for a periodic independent review of the Bank’s loan portfolio and the identification of problem credits; (iii) to review and revise the Bank’s loan policies and procedures to address identified lending deficiencies; and (iv) to adopt and implement a plan to reduce and manage each of the concentrations of credit identified by the FDIC and the Department.

The Consent Orders also require the Bank to obtain the prior approval of the FDIC and the New Jersey Department before declaring or paying any dividend or appointing or changing the title or responsibilities of any director or senior executive officer. Additional regulatory provisions require FDIC prior approval before the Bank enters into any employment agreement or other agreement or plan providing for the payment of a “golden parachute payment” or the making of any golden parachute payment.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry.

The accompanying consolidated financial statements include the accounts of Parke Bancorp, Inc. and its wholly-owned subsidiaries Parke Bank, Parke Capital Markets, Farm Folly, Inc. and Taylors Glen LLC. Also included are the accounts of 44 Business Capital Partners LLC, a joint venture formed in 2009 to originate and service SBA loans. Parke Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I,

Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. All significant inter-company balances and transactions have been eliminated.

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in Parke Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011 since they do not include all of the information and footnotes required by GAAP. The accompanying interim financial statements for the nine months ended September 30, 2012 and 2011 are unaudited. The balance sheet as of December 31, 2011, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results for the full year.

Use of Estimates: In preparing the interim financial statements, management makes estimates and assumptions based on available information that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of expenses and revenues. Actual results could differ from such estimates. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment, fair values of financial instruments and other real estate owned (“OREO”) are significant estimates and particularly subject to change.

Recently Issued Accounting Pronouncements:

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted. This guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In June 2011, the FASB issued guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are effective for interim and annual periods beginning after December 15, 2011 with retrospective application. The Company adopted the accounting standard on January 1, 2012, as required, with no material impact on its results of operations or financial position.

NOTE 3. INVESTMENT SECURITIES

The following is a summary of the Company's investments in available for sale and held to maturity securities as of September 30, 2012 and December 31, 2011:

As of September 30, 2012	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair Value
	(Amounts in thousands)
Available for sale:
U.S. Government sponsored entities	$	7	$	—	$	—	$	—	$	7
Corporate debt obligations		1,500		51		—		—		1,551
Residential mortgage-backed securities		14,172		746		—		—		14,918
Collateralized mortgage obligations		1,024		62		—		—		1,086
Collateralized debt obligations		5,556		—		1,157		504		3,895
Total available for sale	$	22,259	$	859	$	1,157	$	504	$	21,457

Held to maturity:
States and political subdivisions	$	2,058	$	151	$	—	$	—	$	2,209

As of December 31, 2011	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair Value
	(Amounts in thousands)
Available for sale:
U.S. Government sponsored entities	$	1,006	$	5	$	—	$	—	$	1,011
Corporate debt obligations		1,500		43		57		—		1,486
Residential mortgage-backed securities		13,697		764		—		—		14,461
Collateralized mortgage obligations		1,534		73		—		13		1,594
Collateralized debt obligations		5,556		—		1,080		511		3,965
Total available for sale	$	23,293	$	885	$	1,137	$	524	$	22,517

Held to maturity:
States and political subdivisions	$	2,032	$	87	$	39	$	—	$	2,080

The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of September 30, 2012 are as follows:

	Amortized Cost		Fair Value
	(Amounts in thousands)
Available for sale:
Due within one year	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		7,062		5,452
Residential mortgage-backed securities and collateralized mortgage obligations		15,197		16,005
Total available for sale	$	22,259	$	21,457

Held to maturity:
Due within one year	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		2,058		2,209
Total held to maturity	$	2,058	$	2,209

Expected maturities will differ from contractual maturities for mortgage related securities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty.

As of September 30, 2012, securities with a carrying value of $16.4 million, and fair value of $17.3 million, were pledged as collateral for borrowed funds. In addition, securities with a carrying value of $4.6 million, and fair value of $5.0 million, were pledged to secure public deposits.

The following tables show the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011:

As of September 30, 2012	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Amounts in thousands)
Available for sale:
Collateralized debt obligations		—		—		3,593		1,157		3,593		1,157
Total available for sale	$	—	$	—	$	3,593	$	1,157	$	3,593	$	1,157

Held to maturity:
States and political subdivisions	$	—	$	—	$	—	$	—	$	—	$	—

As of December 31, 2011	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Amounts in thousands)
Available for sale:
Corporate debt obligations		—		—		443		57		443		57
Collateralized debt obligations		—		—		3,670		1,080		3,670		1,080
Total available for sale	$	—	$	—	$	4,113	$	1,137	$	4,113	$	1,137

Held to maturity:
States and political subdivisions	$	758	$	39	$	—	$	—	$	758	$	39

Collateralized Debt Obligations: The Company’s unrealized loss on investments in collateralized debt obligations (“CDOs”) relates to three securities issued by financial institutions, totaling $3.6 million. CDOs are pooled securities primarily secured by trust preferred securities (“TruPS”), subordinated debt and surplus notes issued by small and mid-sized banks and insurance companies. These securities are generally floating rate instruments with 30-year maturities, and are callable at par by the issuer after five years. The current economic downturn has had a significant adverse impact on the financial services industry; consequently, TruPS CDOs do not have an active trading market. With the assistance of competent third-party valuation specialists, the Company utilized the following methodology to determine the fair value:

Cash flows were developed based on the estimated speeds at which the trust preferred securities are expected to prepay (a range of 1% to 2%), the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default (a range of 0.57% to 0.66%), and the severity of the losses on securities which default (95%). Trust preferred securities

generally allow for prepayment by the issuer without a prepayment penalty any time after five years. Due to the lack of new trust preferred issuances and the relatively poor conditions of the financial institution industry, a relatively modest rate of prepayment was assumed going forward. Estimates for conditional default rates (“CDR”) are based on the payment characteristics of the trust preferred securities themselves (e.g. current, deferred, or defaulted) as well as the financial condition of the trust preferred issuers in the pool. Estimates for the near-term rates of deferral and CDR are based on key financial ratios relating to the financial institutions’ capitalization, asset quality, profitability and liquidity. Finally, we consider whether or not the financial institution has received TARP funding, and if it has, the amount. Longer-term rates of deferral and defaults are based on historical averages. The fair value of each bond was assessed by discounting its projected cash flows by a discount rate. The discount rates were based on the yields of publicly traded TruPS and preferred stock issued by comparably rated banks (3 month LIBOR plus a spread of 400 to 959 basis points). The fair value for previous reporting periods was based on indicative market bids and resulted in much lower values due to the inactive trading market.

The underlying issuers have been analyzed, and projections have been made regarding the future performance, considering factors including defaults and interest deferrals. The analysis indicates that the Company should expect to receive all contractual cash flows. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, it does not consider these investments to be other-than-temporarily impaired at September 30, 2012.

Other-Than-Temporarily Impaired Debt Securities

We assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired (“OTTI”) and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

The present value of expected future cash flows is determined using the best estimate of cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were as follows for the periods ended September 30, 2012 and 2011.

	For the Nine Months Ended September 30,
	2012			2011

	(Amounts in thousands)
Beginning balance	$	1,950		$	2,657
Initial credit impairment		—			—
Subsequent credit impairments		—			85
Reductions for amounts recognized in earnings due to intent or requirement to sell		—			—
Reductions for securities sold		—			—
Reductions for securities deemed worthless		(731	)		(524	)
Reductions for increases in cash flows expected to be collected		—			—
Ending balance	$	1,219		$	2,218

	For the Three Months Ended September 30,
	2012			2011

	(Amounts in thousands)
Beginning balance	$	1,551		$	2,398
Initial credit impairment		—			—
Subsequent credit impairments		—			28
Reductions for amounts recognized in earnings due to intent or requirement to sell		—			—
Reductions for securities sold		—			—
Reductions for securities deemed worthless		(332	)		(208	)
Reductions for increases in cash flows expected to be collected		—			—
Ending balance	$	1,219		$	2,218

A summary of investment gains and losses recognized in income during the nine month and three month periods ended September 30, 2012 and 2011 are as follows:

	For the Nine Months Ended September 30,
	2012		2011

	(Amounts in thousands)
Available for sale securities:
Realized gains	$	—	$	—
Realized (losses)		—		—
Other than temporary impairment		—		(85	)
Total available for sale securities	$	—	$	(85	)

Held to maturity securities:
Realized gains	$	—	$	—
Realized (losses)		—		—
Other than temporary impairment		—		—
Total held to maturity securities	$	—	$	—

	For the Three Months Ended September 30,
	2012		2011

	(Amounts in thousands)
Available for sale securities:
Realized gains	$	—	$	—
Realized (losses)		—		—
Other than temporary impairment		—		(28	)
Total available for sale securities	$	—	$	(28	)

Held to maturity securities:
Realized gains	$	—	$	—
Realized (losses)		—		—
Other than temporary impairment		—		—
Total held to maturity securities	$	—	$	—

NOTE 4. LOANS

The portfolio of loans outstanding consisted of the following at September 30, 2012 and December 31, 2011:

	September 30, 2012					December 31, 2011
	Amount		Percentage of Total Loans			Amount		Percentage of Total Loans
	(Amounts in thousands)
Commercial and Industrial	$	21,955		3.6	%	$	24,136		3.9	%
Real Estate Construction:
Residential		8,117		1.3	%		21,287		3.4	%
Commercial		41,190		6.8	%		50,361		8.1	%
Real Estate Mortgage:
Commercial – Owner Occupied		148,785		24.7	%		147,449		23.6	%
Commercial – Non-owner Occupied		206,529		34.3	%		204,216		32.6	%
Residential – 1 to 4 Family		138,528		23.0	%		138,768		22.2	%
Residential – Multifamily		20,056		3.3	%		20,126		3.2	%
Consumer		18,400		3.0	%		18,774		3.0	%
Total Loans	$	603,560		100.0	%	$	625,117		100.0	%

The Company maintains interest reserves for the purpose of making periodic and timely interest payments for borrowers that qualify for development and construction loans. Total development and construction loans with interest reserves were $6.4 million and $14.6 million at September 30, 2012 and December 31, 2011, respectively. The amount of interest capitalized from interest reserves and recognized as interest income for the nine month periods ended September 30, 2012 and 2011 was $158,000 and $238,000, respectively. Interest reserves provide borrowers temporary sources of cash flow which can be used to make interest payments during the development or construction phases of a project. It is our expectation that equity in the project increases as the project moves towards completion and that cash flows will be positive once sales begin or stabilization occurs. Loans with interest reserves are monitored throughout the life of the project. Interest accrual may be suspended on interest reserve dependent loans that are not delinquent but are risk rated substandard or worse.

Loan Origination/Risk Management: In the normal course of business the Company is exposed to a variety of operational, reputational, legal, regulatory and credit risks that could adversely affect our financial performance. Most of our asset risk is primarily tied to credit (lending) risk. The Company has lending policies, guidelines and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Board of Directors reviews and approves these policies, guidelines and procedures. When we originate a loan we make certain subjective judgments about the borrower’s ability to meet the loan’s terms and conditions. We also make objective and subjective value assessments on the assets we finance. The borrower’s ability to repay can be adversely affected by economic changes. Likewise, changes in market conditions and other external factors can affect asset valuations. The Company actively monitors the quality of its loan portfolio. A reporting system supplements the credit review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, troubled debt restructures, nonperforming and potential problem loans. Diversification in the loan portfolio is another means of managing risk associated with fluctuations in economic conditions.

With respect to construction loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally underwritten based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. Commercial real estate loans may be riskier than loans for one-to-four family residences and are typically larger in dollar size. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. The repayment of these loans is generally largely dependent on the successful operation and management of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location within our market area. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also monitors economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer loans may carry a higher degree of repayment risk than residential mortgage loans. Repayment is typically dependent upon the borrower’s financial stability which is more likely to be adversely affected by job loss, illness, or personal bankruptcy. To monitor and manage consumer loan risk, policies and procedures are developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. Historically the Company’s losses on consumer loans have been negligible.

The Company maintains an outsourced independent loan review program that reviews and validates the credit risk assessment program on a periodic basis. Results of these external independent reviews are presented to management. In 2011 the Company expanded its risk monitoring program by creating a standalone Credit Risk Management Department. The external independent loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit risk management personnel.

Nonaccrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provision. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued

interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

An age analysis of past due loans by class follows:

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
	(Amounts in thousands)

Commercial and Industrial	$	68	$	—	$	303	$	371	$	21,584	$	21,955	$	—
Real Estate Construction:
Residential		—		—		1,035		1,035		7,082		8,117		—
Commercial		—		—		14,501		14,501		26,689		41,190		—
Real Estate Mortgage:
Commercial – Owner Occupied		—		—		1,864		1,864		146,921		148,785		—
Commercial – Non-owner Occupied		375		5,036		24,122		29,533		176,996		206,529		—
Residential – 1 to 4 Family		1,299		—		7,634		8,933		129,595		138,528		—
Residential – Multifamily		—		—		3,160		3,160		16,896		20,056		—
Consumer		66		—		291		357		18,043		18,400		—
Total	$	1,808	$	5,036	$	52,910	$	59,754	$	543,806	$	603,560	$	—

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
	(Amounts in thousands)

Commercial and Industrial	$	603	$	—	$	—	$	603	$	23,533	$	24,136	$	—
Real Estate Construction:
Residential		350		—		5,265		5,615		15,672		21,287		—
Commercial		—		—		7,703		7,703		42,658		50,361		—
Real Estate Mortgage:
Commercial – Owner Occupied		1,358		—		4,797		6,155		141,294		147,449		—
Commercial – Non-owner Occupied		1,574		—		18,132		19,706		184,510		204,216		—
Residential – 1 to 4 Family		2,587		—		7,691		10,278		128,490		138,768		—
Residential – Multifamily		—		—		597		597		19,529		20,126		—
Consumer		—		—		274		274		18,500		18,774		—
Total	$	6,472	$	—	$	44,459	$	50,931	$	574,186	$	625,117	$	—

Impaired Loans: Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In addition, any loan that is modified in a troubled debt restructuring is considered impaired.

All impaired loans have an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell (a range of 5% to 10%) and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value. Prior to receiving the updated appraisal, we will establish a specific reserve for any estimated deterioration, based upon our assessment of market conditions, adjusted for estimated costs to sell and other identified costs. If the NRV is greater than the loan amount, then no impairment loss exists. If the NRV is less than the loan amount, the shortfall is recognized by a specific reserve. If the borrower fails to pledge additional collateral in the ninety day period, a charge-off equal to the difference between the loan carrying value and NRV will occur. In certain circumstances, however, a direct charge-off may be taken at the time that the NRV calculation reveals a shortfall. All impaired loans are evaluated based on the criteria stated above on a quarterly basis and any change in the reserve requirements are recorded in the period identified. All partially charged-off loans remain on nonaccrual status until they are brought current as to both principal and interest and have at least six months of payment history and future collectability of principal and interest is assured.

Impaired loans are set forth in the following tables.

September 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	803	$	870	$	—
Real Estate Construction:
Residential		1,519		3,319		—
Commercial		14,435		14,435		—
Real Estate Mortgage:
Commercial – Owner Occupied		5,600		5,784		—
Commercial – Non-owner Occupied		47,547		51,019		—
Residential – 1 to 4 Family		12,608		13,464		—
Residential – Multifamily		3,538		3,538		—
Consumer		291		327		—
		86,341		92,756		—

With an allowance recorded:
Commercial and Industrial		—		—		—
Real Estate Construction:
Residential		—		—		—
Commercial		481		538		34
Real Estate Mortgage:
Commercial – Owner Occupied		938		938		55
Commercial – Non-owner Occupied		3,571		3,571		45
Residential – 1 to 4 Family		507		764		16
Residential – Multifamily		—		—		—
Consumer		—		—		—
		5,497		5,811		150

Total:
Commercial and Industrial		803		870		—
Real Estate Construction:
Residential		1,519		3,319		—
Commercial		14,916		14,973		34
Real Estate Mortgage:
Commercial – Owner Occupied		6,538		6,722		55
Commercial – Non-owner Occupied		51,118		54,590		45
Residential – 1 to 4 Family		13,115		14,228		16
Residential – Multifamily		3,538		3,538		—
Consumer		291		327		—
	$	91,838	$	98,567	$	150

December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	603	$	603	$	—
Real Estate Construction:
Residential		4,440		5,246		—
Commercial		12,898		13,118		—
Real Estate Mortgage:
Commercial – Owner Occupied		6,946		6,946		—
Commercial – Non-owner Occupied		30,424		30,852		—
Residential – 1 to 4 Family		8,477		10,737		—
Residential – Multifamily		597		667		—
Consumer